Bank of England minutes reveal MPC split on level of QE
Wednesday, 22 February 2012 11:17
The minutes from the latest Bank of England Monetary Policy Committee (MPC) rate-setting meeting earlier this month have been released and show the details behind its decision to increase the programme of quantitative easing (QE) by £50 billion to £325 billion.
Seven members voted for the extension of QE by £50 billion whilst two members of the nine man committee wanted the asset purchase programme to be increased by £75 billion. David Miles and Adam Posen voted for £75 billion. Mr Posen has been at the forefront of the MPC argument for more stimulus.
The minutes said: “The Committee considered the arguments for increasing the stock of asset purchases by £50 billion or £75 billion, either of which would be sufficient to put inflation broadly on track to meet the target in the medium term on its central projection. Committee members placed different weights on these arguments.”
Howard Archer, Chief UK & European Economist at IHS Global said: “The minutes of the February meeting of the Bank of England’s Monetary Policy Committee reveal increasing divergences of opinion within the MPC over policy but suggest that the door remains open for more Quantitative Easing should the economy struggle for sustained growth over the coming months.”
The recent positive economic data seen in January, particularly from the manufacturing and service sector purchasing managers index reports seemed to sway the majority of the MPC towards £50 billion rather than £75 billion.
“An increase of £50 billion in the stock of asset purchases would represent a material monetary stimulus, and it was not clear that a stimulus larger than that was warranted at the current juncture. In addition, given market expectations, a larger increase risked sending a signal that the Committee thought the economic situation was weaker than it was,” the minutes said.
In terms of inflation risk and how far further inflation will fall, the MPC expect to see a period of prolonged depressed demand that will push inflation to below the Bank’s target of two per cent over the next 12 months. The MPC then believe it is too close to call as to whether inflation will increase or decrease above or below the two per cent target.
Read more: MPC minutes for January
Inflation
The minutes said: “The fall in CPI inflation since its peak in September had largely matched the Committee’s expectations. CPI inflation was expected to fall further over the next few months. The Committee’s central forecast was for inflation to continue to decline during 2012 to below the 2% target by the beginning of 2013.
“The Committee recognised that there were substantial risks to inflation in the medium term in both directions, and that it would be some time before the uncertainties around these risks were resolved.”
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Interest rates
Interest rates were not a topic for much discussion and no member thought there should be any change in the base rate which has remained at 0.5 per cent since March 2009.
The minutes said: “Overnight index swaps suggested that market participants expected Bank Rate to remain unchanged for around two years.”
GDP
Positive economic data in the early weeks of 2012 seemed to have persuaded the MPC that GDP is likely to grow in the first quarter but will be mixed over the course of the year.
The minutes said: “Taking all these factors together, it seemed likely that growth in the first quarter of 2012 would be somewhat stronger than the Committee had expected at its previous meeting.
“Quarterly GDP growth was likely to be volatile over 2012, given one-off factors including the additional bank holiday associated with the Queen’s Diamond Jubilee.
“Four-quarter GDP growth was projected to strengthen gradually over the forecast period, as consumption growth picked up and, further ahead, business investment rebounded from its current depressed level.”
Quantitative easing
There was some debate about the level of extra quantitative easing needed but all were agreed that more was required. The minutes show that the MPC had to judge “the impact of the Committee’s asset purchases on demand.”
The minutes reveal that the MPC believe that the effect of its QE programme will be to keep GDP close to its historical average.
“ There remained a range of views among Committee members about the likely effects of those factors on GDP. The Committee’s best collective judgement – on the assumption that Bank Rate moved in line with market interest rates and the stock of purchased assets was held constant at £325 billion – was that by the end of the second year of the forecast, the risks of growth being above or below its historical average were roughly equal,” it said.
The MPC explained their decision to increase QE by £50 billion to £325 billion by saying: “An increase of £50 billion in the stock of asset purchases would represent a material monetary stimulus, and it was not clear that a stimulus larger than that was warranted at the current juncture. In addition, given market expectations, a larger increase risked sending a signal that the Committee thought the economic situation was weaker than it was.”
Mr Archer said: “We believe that additional QE is more likely than not. There still seems to be a modest policy easing bias within the MPC and we anticipate that economic developments will warrant further limited stimulative action despite recent signs of improvement.”
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